Foreign investors sell while individuals buy... Diverging flows in the September bond market

[The Financial News] Amid growing uncertainty in the bond market, foreign investors were net sellers of domestic bonds last month. Individual investors, by contrast, actively bought bonds on a net basis, taking the opposite approach.
According to the “September Over-the-Counter Bond Market Trends” released by the Korea Financial Investment Association on the 12th, foreign investors were net sellers of domestic bonds worth 1.158 trillion won last month. They sold 248 billion won in Treasury bonds and 979 billion won in Monetary Stabilization Bonds.
Foreign investors’ holdings of domestic bonds stood at 336.9 trillion won, down 7.8 trillion won from 344.7 trillion won at the end of the previous month.
The association said, “As currency swap (CRS) rates rose from the start of the month, the inversion in the swap basis widened, weakening foreign investors’ incentives for arbitrage trades,” and analyzed that “foreign investors’ bond selling intensified, particularly in short-term bonds.”
Individual investors, by contrast, were net buyers of domestic bonds worth 4.0225 trillion won last month, an increase of 816.4 billion won from 3.2061 trillion won the previous month. They were net buyers of 1.3342 trillion won in Treasury bonds, 769.3 billion won in special bonds and 499.3 billion won in corporate bonds. Net purchases of bank bonds totaled 801.4 billion won.
Bond yields rose sharply amid escalating tensions in the Middle East and a steep rise in international oil prices, among other factors. Foreign investors’ net selling of three-year Treasury bond futures also contributed to the rise in yields.
The yield on three-year government bonds stood at 4.011% at the end of September, up 17.3 basis points from the end of the previous month (1 basis point = 0.01 percentage point). The one-year yield was 3.733% and the two-year yield was 3.978%, up 29.2 and 28.2 basis points, respectively, from the previous month-end. By contrast, the 20-year yield fell 7.0 basis points to 4.420%, while the 30-year yield edged down 0.1 basis point to 4.518%, virtually unchanged.
Over-the-counter bond trading totaled 448.7 trillion won last month, up 60.3 trillion won from the previous month. However, the volume was 68.2 trillion won lower than in the same month a year earlier, leaving it below levels seen in previous years.
Bond issuance totaled 87.4 trillion won, up 11.8 trillion won from the previous month. The increase came as issuance of financial and corporate bonds each rose by around 6.3 trillion won, despite a decline in Treasury issuance. Total outstanding bonds amounted to 3,186.8 trillion won.

[email protected] Seo Min-ji Reporter